15-year rate offers advantage

For most home buyers, the greatest expense associated with buying their home is the interest they will spend over the years on the loan they use for their purchase. So any time a buyer can cause major savings in that department, it is newsworthy.

A few weeks ago I noted a larger than usual rate differential between 30-year fixed-rate loans and 15-year fixed-rate loans. Typically, there is less than a half-point interest rate difference, with the lower rate given to the shorter term because it theoretically represents less risk to the lender. The lower the risk, the lower the rate.

I assumed that the slightly greater than usual loan rate difference between 30- and 15-year loans would vanish as the market worked things out, but apparently I was wrong. According to this week’s Bankrate survey, the 15-year rate is still more than half a percentage point below the 30-year rate.

On a national basis, 15-year fixed-rate loans dropped to 4.97 percent. In contrast, the 30-year rate seems high at 5.65 percent. The discount for the shorter term is noteworthy.

Of course, the price you pay for getting the lower interest rate is a higher monthly payment.

On a typical metro Atlanta loan of $150,000, your payment at the 30-year term would be about $866, while your 15-year payoff would call for almost $1,184 monthly. Yes, you save a lot in interest, but the higher monthly total may not be affordable.

But there’s another choice available. One that might get the rate you want and at the same time make your payment even more attractive.

It’s called the 5/1 adjustable program. The interest rate is set at 5.03 percent, and the term of the loan is a full 30 years, making your initial monthly payments a low $808. But there’s just one catch.

The initial rate of 5.03 percent ends after five years, and the loan converts to a one-year adjustable program. Your payment then goes up or down depending on changes in the interest-rate market. And of course, no one can know where rates will be in five years.

The 5/1 ARM is a perfect choice if you are relatively sure you will be moving in five years or less, but it becomes less attractive as time wears on.

If you want to get the best interest rate coupled with the peace of mind a fixed-rate loan brings, you’ll still have to make the big monthly payment. If you can afford the monthly total, go with the 15-year fixed rate.

John Adams is a broker and investor. He answers real estate questions on radio station WGKA (920 am) at noon every Saturday. For more real estate information or to make a comment, visit www.money99.com.